Correspondence: Massimo Guidolin, Manchester Business School, MAGF; MBS Crawford House, Booth Street East, Manchester M13 9PL, UK. Tel: +44 (0)161 306 6406; Fax: +44 (0) 161 275 4023; E-mail: Massimo.Guidolin@mbs.ac.uk

¹obtained her PhD in 2004 from Turin, Italy and is a post-doc at University of Turin and research fellow at Collegio Carlo Alberto. Since 2004 she has been involved in the project 'Asset Classes for Long Run Investors'. Her research on real estate diversification has recently appeared in the Journal of Real Estate Finance and Economics.

²obtained his PhD in 2000 from University of California and is a Chair Professor of Finance at Manchester Business School. He also served as an Asst. Vice-President and Senior Policy Consultant (Financial Markets) within the US Federal Reserve system (2004–2007), where he still covers advising roles. From August 2008 he will be in charge of the programme 'Asset Classes for Long Run Investors' at the Center for Research on Pensions and Welfare (CeRP). His research focuses on predictability and non-Iinear dynamics in financial returns, with applications to portfolio management. He has published papers in the American Economic Review, the Review of Financial Studies, the Journal of Business and the Journal of Econometrics, among others.

³obtained her PhD in 1993 from Princeton and is a Professor of Financial Economics at University of Turin, Italy. She is also research fellow at Collegio Carlo Alberto and founding member of CeRP. She has been the leading researcher for the programme 'Asset Classes for Long Run Investors' at CeRP between 2004 and 2008. Her research interests focus on corporate governance and optimal asset allocation in the presence of innovative and alternative asset classes. Her research has been published in the Journal of Finance, the European Economic Review and the Journal of Banking and Finance.

Received 26 October 2007; Revised 26 October 2007.

Abstract

We calculate the ex-post, realised portfolio performance for an investor who diversifies among US stocks, bonds, real estate indirect investment vehicles (E-REITS), and cash. Simulations are performed for two alternative asset allocation frameworks — classical and Bayesian — and for scenarios involving two different samples and six different investment horizons. Interestingly, the ex-post welfare cost of restricting portfolio choice to traditional financial assets (ie, stocks, bonds, and cash) is only found to be positive in all scenarios for a Bayesian investor. On the contrary, substitution of E-REITS for stocks in optimal portfolios turns out to reduce ex-post portfolio performance over the nineties and for a Classical investor who ignores parameter estimation uncertainty.